EU: Transfer pricing adjustment only relevant for VAT purposes if qualified as adjustment of transaction price agreed between parties

The Court of Justice of the European Union (CJEU) on January 15, 2025, published the non-binding opinion of its Advocate General (AG) regarding the value added tax (VAT) treatment applicable to transfer pricing adjustments. The case is: Stellantis Portugal, S.A., C‑603/24.

Facts

A Portuguese taxpayer operated as the national sales company for a car manufacturer in 2006, buying vehicles from the group’s European original equipment manufacturers (OEMs) and reselling them to independent Portuguese dealers, who then sold to final customers. When dealers repaired manufacturing-defective vehicles, they charged the taxpayer for the repair costs plus VAT. The taxpayer notified the OEMs of those after‑sales costs (including warranty and roadside assistance) and other operating costs, and the OEMs adjusted the transfer prices under an intra‑group pricing contract—documented by credit or debit notes—to align the distributor’s actual operating profit with an agreed target.

The Portuguese tax authority audited the taxpayer’s 2006 accounts and concluded that the taxpayer had effectively provided taxable services to the OEMs within Portugal, based on sourcing applicable to the provision of services at the time, and assessed additional VAT.

Question referred to the CJEU

Does the concept of provision of services effective consideration in the EU VAT Directive include an adjustment of the sale price of vehicles that is duly provided for and determined in a contract concluded between the parties, to achieve a minimum profit margin, and which is documented by means of a credit or debit note?

Advocate General opinion

According to the AG, treating a reimbursement as payment for a service would require the taxpayer to have actually performed a distinct service for the OEMs and received positive consideration. However, in this case the adjustments merely reconciled agreed transfer prices, allocated intra‑group profits, and reflected the buyer’s ordinary obligation to cover warranty and repair costs—elements that VAT treats as adjustments to the original transaction price rather than as taxable services. Therefore, the AG opined that the adjustment of the consideration for a sale, expressly referred to in the question, can never itself constitute a provision of services.

The AG further highlighted that the case examines whether such transfer pricing adjustments, aimed at appropriately allocating profits between intra-group companies, should be treated as significant changes to the taxable amount for VAT purposes, as a taxable amount for a separate service, or as irrelevant profit adjustments between affiliated entities. In this respect, the AG observed that Advocate General Richard de la Tour previously argued in Arcomet Towercranes (C‑726/23, read TaxNewsFlash)) that income tax rules should not dictate VAT treatment, focusing instead on whether the conditions of a taxable transaction are met. Unlike Advocate General Richard de la Tour, the AG in this case considered it to be entirely possible and even necessary to give a principled answer to the question of the consequences under VAT law of an adjustment of transfer pricing made for reasons of income tax law. Despite the complex reality in a systematic area of law such as VAT law, this did not necessarily have to be decided afresh, on a case-by-case basis, each time. Indeed, there are certain situations in which an adjustment of transfer pricing may, in some circumstances, have consequences for the purposes of VAT law, and others in which it does not. Those situations can also be distinguished from each other, without being exhaustive.

The AG thus suggested to reformulate the question referred to the CJEU as follows: “Must an adjustment of the consideration for an intra-group supply that is made for income tax reasons be regarded as a significant change in the taxable amount for the purposes of VAT law in accordance with Article 90 of the VAT Directive or as the taxable amount for a separate service supplied by the person who benefits from the change in the transfer price, or is it irrelevant for the purposes of VAT law as a mere adjustment of profits between two intra-group undertakings?” The AG then analyzes 3 potential scenarios:

1. Separate provision of service for the creation of input and output vs. fictitious invoicing of fictitious sales intended to correct profits
2. Subsequent adjustment of the transfer price by the tax authority for the purposes of profit adjustment
3. Subsequent adjustment of an undetermined but determinable (variable) price

1. Separate provision of service for the creation of input and output vs. fictitious invoicing of fictitious sales intended to correct profits

Under Article 2(1)(c) of the EU VAT Directive, services provided for payment within an EU member state by a taxpayer are subject to VAT, requiring a legal relationship between the provider and recipient involving reciprocal performance, when payment constitutes the actual consideration for the service. This legal relationship is broadly interpreted, typically arising from a contract where services and payment are agreed. In the current case, however, the applicant purchased and resold cars, bearing warranty costs without any contractual basis for a service provided to the seller. The tax authority’s claim that the applicant supplied services through warranty distribution and management in return for price adjustments was inconsistent with reality, as no such service agreement existed. Even if such a contract were present, it would likely represent a fictitious service irrelevant to VAT on consumer goods expenses.

2. Subsequent adjustment of the transfer price by the tax authority for the purposes of profit adjustment

When a tax authority unilaterally adjusts a transfer price to allocate profits between companies in different countries, this adjustment primarily affects income tax by increasing or decreasing profits in one jurisdiction, but it does not necessarily result in a corresponding adjustment in the other jurisdiction due to differing views on transfer pricing. VAT however operates differently, as price adjustments directly impact both the seller’s tax liability and the buyer’s VAT deduction based on the agreed price rather than an objective market value. The tax authority’s view of the correct transfer pricing may therefore have consequences under income tax law; it does not, in principle, have any consequences under VAT law. In the present case, the parties’ views as to the amount of the consideration remain decisive.

3. Subsequent adjustment of an undetermined but determinable (variable) price

The AG observed that the case involved the subsequent adjustment of a variable price for vehicles, when the initial price was undetermined but determinable based on specific parameters, such as the purchaser's distribution and warranty costs. At the end of each period, the price was adjusted so that the purchaser's operating profit matched the target profit, with the purchase price increasing or decreasing accordingly. This situation is addressed in the EU VAT Directive. Article 90 of the EU VAT Directive mandates a reduction in the taxable amount when the price decreases after the transaction, while Article 73 accounts for subsequent price increases, ensuring the taxable amount reflects the total received for the transaction. These provisions confirm that price adjustments directly affect the taxable amount of the original transaction rather than constituting a separate provision of services. The CJEU has previously addressed similar scenarios, distinguishing between general adjustments without reference to individual goods and contractually agreed changes to variable prices, emphasizing the importance of specific arrangements in determining VAT implications.

The AG further observed that the CJEU’s ruling in Arcomet Towercranes does not preclude that conclusion. First, that case did not concern the adjustment of a transfer price, but the existence of a provision of services for consideration if the profit was too high or too low. Irrespective of whether the result is actually convincing in that specific case or whether fictitious services were in fact invoiced, the CJEU ultimately held only that there is a supply of services for consideration where the parties have contractually agreed on a provision of services for consideration, presumably on the assumption that the service was actually supplied.

The AG recommended the CJEU to answer the question as follows:

• When the adjustment of profits is made by means of separate provision of services for consideration (creation of input and output) and there are not only fictitious provisions of services, those separate provisions of services for consideration constitute taxable transactions for the purposes of Article 2(1)(c) of Directive 2006/112.
• When the adjustment of profits is made unilaterally and subsequently by the tax authority solely for the purposes of an appropriate allocation of profits between two tax-levying states, that is not, in principle, relevant for the purposes of VAT law.
• When an adjustment of profits is made by means of a sale price that has been provided for precisely that purpose and agreed to be variable and which relates to a specific sale of goods, such adjustment constitutes a reduction in the taxable amount under Article 90 of the EU VAT Directive or a further part of the taxable amount under Article 73 thereof in respect of the sale made. Since the change in the taxable amount of a sale relates solely to the consideration, it cannot itself constitute a provision of services for consideration.

KPMG observation

The AG recommended the CJEU to take a more straight-forward answer to the issue of whether transfer pricing adjustments have VAT implications. While not contradicting the CJEU decision in Arcomet Towercranes, the AG offers a simple distinction: pure adjustments for income tax purposes are outside the scope of VAT, while adjustments that relate to real transactions and agreed between the parties should be considered an adjustment to the initial price and not result in a separate provision of services. If the CJEU decides to follow the opinion of its AG, the decision would greatly clarify this long-standing question.

It should be noted that while, as the AG highlights, the agreed price rather than an objective market value is the basis for VAT, the EU VAT Directive includes an optional provision that allows EU member states to take into consideration the open market value in specific circumstances where one of the related parties has not a full right to deduct VAT (e.g., in the case of financial services or real estate). Therefore, the AG’s recommendations would likely not apply in these cases and transfer pricing adjustments for income tax purposes may have to be taken into consideration.

Read a January 2026 report (Swedish) prepared by the KPMG member firm in Sweden

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com